Functional Organisations

Whereas the fundamental principle of a conventional business unit structure (strategic business units) is to align accountability and control, the fundamental principle of a functional organisation is to align expertise and decision rights. As Chandler famously argued, "structure follows strategy", even though many organisations do not use the structure that he anticipated large multinationals would in fact adopt.

Three key leadership characteristics that leaders I believe should possess are:

deep expertise: this allows leaders and senior managers to meaningfully engage in all the work being done within their individual functions; immersion in the details: of those functions; and a willingness to collaboratively debate other functions during collective synergistic decision-making. When managers have these attributes, decisions are made in a coordinated fashion by the people most qualified to make them. This is in fact a bottoms-up Kaizen approach with quality circles.

Deep expertise. In many organisations today managers do not oversee managers; rather, it is where experts lead experts. The assumption is that it is easier to train an expert to manage well than to train a manager to be an expert.

Immersion in the details. Leaders should in fact know the details of their organisation three levels down, because I believe that it is essential for speedy and effective cross-functional decision-making at the highest levels. If managers attend a decision-making meeting without the details at their disposal, the decision must either be made without the details or postponed. Managers tell war stories about presentations to senior leaders who drill down into cells on a spreadsheet, lines of code, or a test result on a product.

This in fact flies in the face of prevailing management theory that organisations should be reorganized into divisions and business units as they become large. But something vital gets lost in a shift to business units: the alignment of decision rights with expertise.

A meta-analysis of the relationships between organisational innovation and 13 of its potential determinants resulted in statistically significant associations for specialization in organisational processes: functional differentiation, professionalism, centralization, managerial attitude toward change (can be a real challenge), technical knowledge resources, administrative intensity, slack resources, and external and internal communication, including EFE and IFE matrices. Results suggest that the relations between the determinants and innovation are stable, casting doubt on previous assertions of their instability. Moderator analyses indicated that the type of organization adopting innovations and their scope are more effective moderators of the focal relationships than the type of innovation and the stage of adoption, which can in fact be aligned to the diffusion process.

Several theories of innovation are examined in terms of the aggregated data. So why do organisations so often cling to having general managers in charge of strategic business units (SBUs)? One reason I believe is that making the change is difficult. It entails overcoming inertia, reallocating power among managers, changing an individual-oriented incentive system, and learning new ways of collaborating. That is rather daunting when an organisation already faces huge challenges. An intermediate step may be to cultivate the experts-leading-experts model even within a strategic business unit structure. For example, when filling the next senior management role (C-suite), chose an individual with deep expertise in that particular area as opposed to choosing someone who might make the best general manager. However, a fully-fledged transformation requires that leaders also transition to a functional organisation. The rewards may justify the risks. Its approach can produce extraordinary results. Traditional organisational structures come in four general types – functional, divisional, matrix and flat – but with the rise of the digital marketplace, decentralized, team-based organisational structures are disrupting old business models. The fourth Industrial Revolution will no doubt add to the challenges confronted in a functional structure.

Information quality dimensions of accuracy, accessibility, relevancy, completeness, accuracy, and timeliness are the factors that determine whether the information received by leaders and managers meet the quality. The effective decision making effectiveness of managers depends on the structure of the organisation. A formalized organisational structure, for example, is likely to affect the information quality, and, hence, the decision-making process. It is important to moderate the effect of organisational structure on the link between information quality and decision making effectiveness in any organisation. As an organisations product portfolio and the number of projects expand, there is more coordination (synergy) with other functions required, increasing the complexity of collaborating across the many strategic business units.

As organisations grow, entering new markets (disruptive and nondisruptive creation) and moving into new technologies (nondisruptive), the functional structure and leadership model have had to evolve. Deciding how to organize areas of expertise to best enable collaboration and rapid decision-making has been an important responsibility for the CEO. I believe that an organisation should be disciplined about limiting the number of senior positions to minimize how many leaders must be involved in any cross-functional activity. (Span of Management/control).

Prof Rory Dunn.